EUR 850.00 For Business Accounts Only

Morningstar | Deutsche Boerse Is Largely Meeting Its Goals, Guides Toward Lower End of Growth Ranges for 2019

Narrow-moat Deutsche Boerse's fourth-quarter and full-year 2018 results were roughly in line with our overall thesis on the firm. We do not plan to make any material changes to our EUR 107 fair value estimate. Overall, the company met its medium-term goals. Net revenue was up 13% for the full year, operating costs rose only 5%, and EBITDA was up 17%, all on an adjusted basis. This led to an increase in adjusted net income for shareholders of 17%, as adjusted earnings per share increased 18% to EUR 5.42. Reported net income was actually down for the year, primarily related to higher operating costs due to one-time restructuring and legal charges. Exceptional operating charges are expected to be roughly EUR 100 million in 2019 compared with EUR 244 million in 2018. The board proposed a 10% increase in the dividend, to EUR 2.70 per share. Management largely stuck to its medium-term goals, although guidance was toward the lower end of previous ranges, with management expecting at least 5% secular net revenue growth, and roughly 10% adjusted net income growth for 2019 results. We largely agree, and wouldn’t be surprised to see cyclical growth drivers recede a bit in 2019, while secular growth drivers also decline closer to 5% from 6% in 2018.

Eurex had a very strong performance for 2018, with total revenue up 17.5% as interest-rate and equity index derivatives drove the majority of revenue growth, up 11% and 20%, respectively. The firm’s new over-the-counter clearing initiative did quite well in 2018, all things considered, with related revenue up over 100% to nearly EUR 26 million for the year. We applaud the exchange for taking advantage of Brexit-related uncertainty to grow a previously almost nonexistent business at this rate, but growth slowed down significantly in the fourth quarter. As was our thesis from the start, it appears that London Stock Exchange is poised to maintain its near monopoly in this space after Brexit.

EEX and 360T also continued on their strong growth trajectories, with revenue at 360T up 18% year over year and revenue at EEX up 21%. Xetra’s growth was a bit slower, with revenue up 5%. Clearstream's revenue increased roughly 8% for the year, almost entirely due to increasing net interest income. We would expect this cyclical tailwind to abate as rate increases all but cease in the U.S. in 2019. Finally, Deutsche Boerse saw double-digit revenue growth in its IFS, GSF, and data segments, as well, as each of these segments has stronger secular tailwinds pushing results higher.

We are cognizant of where we may be in the current market cycle and realize that a decline in volumes may occur over the next two to three years, and this is already playing out to some extent as management begins to issue guidance at the lower end of their previous growth ranges. As such, we would not be surprised if the current growth rates slow down even more at some point over the medium term.